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ESG 2.0 – Investors reveal lingering concerns despite hopeful signs

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Greenwashing, product availability, and doubts about underperformance are continuing to raise apprehensions around ESG investments. While investments focused on positive environmental impact (‘E’) remain the top choice for investors — the ‘S’ and the ‘G’ are not getting as much attention.

That is according to the panellists and attendees of The Next Stage of the Journey for ESG in Asia webinar, hosted by Asian Private Banker on 21 April, in collaboration with Global X ETFs by Mirae Asset.

Eugenia Koh, Standard Chartered

‘S’ remains undefined
Eugenia Koh, head of sustainable investing at Standard Chartered Bank, said: “To be perfectly honest, I think the ‘S’ is still a bit nebulous for clients. Earlier during the pandemic, there was some discussion around how the ‘S’ might have come into spotlight, but it’s still quite general for clients and they don’t associate it with ESG.”

Koh feels the metrics that measure ‘S’ and how it correlates to risk management, or even performance, is a bit less investigated and more tenuous. As such, there is still a little more to go from the social aspect in terms of quantifying it and its impact on portfolios.

Victor Cheung, Mirae Asset

‘G’ needs love too
In addition to the ‘S’, Victor Cheung, director and ETF investment strategist at Mirae Asset, pointed out that the ‘G’ too has attracted less attention. “Board diversity and executive pay, for example, are all important considerations to drive a security investing value. I think, increasingly, investors should focus on the governance and the social factors as well,” he stressed.

In Hong Kong and China, Taie Wang, chief business development officer of Hang Seng Indexes Company, believes it will take a little more than two years for the ‘S’ and ‘G’ to gain much more prominence from a regulatory perspective.

Wang said both countries are focused on environmental related goals and the other two aspects are quite insignificant. What’s more, “there should be more education for investors” around the those themes. Right now, “investors are flocking to low carbon related themes such as renewable energy or electric vehicles”.

Taie Wang, Hang Seng Indexes Company

Myth of underperformance
When we asked the webinar’s audience what the challenge is to increase ESG allocation in their or their clients’ portfolios, 40% cited “concerns about underperformance”. “Greenwashing” was a concern for 20%, while the remaining felt there was a “lack of suitable products”.

Koh said allocations have broadly remained the same this year at Standard Chartered, but volatility has affected general sentiment for investors to increase allocations. “Based on our chats with many investors, they still believe in the myth of underperformance.”

“However, I think that’s slowly changing. Essentially, a lot of them had the experience of investing in the first batch of ESG funds 10 to 15 years ago, which were developed based mainly on exclusions — and that didn’t perform for them.

“So for some of those investors, that is still a lingering concern. Still, I think with ESG 2.0, the ESG industry has matured. It’s not just about exclusions, but about integration. We found too that investors still find the ESG jargon too confusing,” she explained.

Taie noted that the product scene in Hong Kong and China remains highly concentrated on certain climate-related themes, and that may not be suitable for investors who like exposure to the broader market and diversified strategies.

Measuring the positive impact of ESG
Asked what their or their clients’ key considerations were for selecting an ESG strategy, 69% of the webinar’s audience cited “outperformance over broad based index”, while 15% chose “cost and fee”. “Risk reduction” was named by 7% and the remaining voted “non-financial return such as ESG contribution”.

“I’m surprised that risk reduction is 7%,” Koh said, “because when we speak to clients they actually do understand the risk part, but are a bit more sceptical about the performance. If you look at the research out there, it’s still quite mixed. Yet, from a risk mitigation perspective, that is definitely something that has been relatively proven.”

Cheung pointed out that a lot of professional investors are adding non-financial contributions or non-financial return in their investment policy statements to achieve a certain 5% or 10% return every year.

“They’re trying to make an impact to the environment or to different social aspects every year and they measure the progress,” he said, recommending investors to “enter back into fixed income because the yield is now more attractive, they can express their green view by investing in green bonds”.

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